Twitter posts huge 61% revenue increase in second quarter

Twitter Inc. blew past Wall Street expectations in the second quarter, but interim chief executive and co-founder Jack Dorsey was far from thrilled.

In a surprisingly candid call with analysts Tuesday, Dorsey — who regained the top spot at Twitter last month — criticized the company’s lack of focus, unintuitive service and difficulties communicating the value of using Twitter. Furthermore, he said recent product initiatives have yet to produce “meaningful impact” on growth and engagement, which “is unacceptable and we’re not happy about it.”

Dorsey’s remarks underscore the problems that Twitter faces. The San Francisco microblogging company has consistently disappointed investors and been plagued by management dysfunction and sluggish user growth.

For the second quarter, Twitter’s average monthly active users, a key growth metric, totaled 304 million core users, up just 2 million from the first quarter.

After nine years in business, the company still largely appeals to only “early adopters and technology enthusiasts,” Anthony Noto, Twitter’s chief financial officer, said during the call. Simply put, he said, the product remains too difficult for many to use.

“We have not yet reached the cohort of users known as the mass market,” Noto said. “Non-users continue to ask: Why should I use Twitter?”

More troubling, he said that Twitter doesn’t expect to see “meaningful” user growth for a considerable amount of time.

Dorsey is demanding more disciplined execution internally and hopes to simplify Twitter while making it more relevant. For instance, he praised the company’s new “While you were away” feature, which pushes interesting tweets to the top of a user’s feed. He also pledged to improve Twitter’s marketing to entice more people to sign up for the social network.

“You should expect Twitter to be as easy as looking out your window to see what’s happening,” Dorsey said. “Twitter also has to be the most powerful microphone in the world.”

Analysts are waiting to see if Twitter can pull it off.

“When you put that all
together, this becomes a prove-it story,” said Robert Peck, an analyst at SunTrust Robinson Humphrey. “You have to show that you can execute on your initiatives and they’re resonating.”

But Brian Wieser of Pivotal Research Group offered a contrarian view, saying that obsession over user growth is misplaced and that Twitter perhaps isn’t meant to reach mass-market size.

“Wall Street has been trained by the management team that this is set to be a ubiquitous product, which just seems incorrect to me,” he said. “Maybe management should realize that this was a stretch goal.... I’ve argued that Twitter is to Facebook what radio is to television. It’s like radio being disappointed that they don’t have the TV money.”

Financially, it was a solid quarter. Twitter reported second-quarter revenue of $502 million, up 61% compared with a year earlier and well above analyst estimates of $481 million.

It posted a net loss of
$137 million, which was narrower than a year ago. Adjusted for stock compensation and one-time expenses, Twitter had a profit of $49 million, or 7 cents a share, which exceeded expectations for 4 cents a share.

The company said ad revenue totaled $452 million, an increase of 63% year over year. Mobile advertising revenue accounted for 88% of total advertising revenue.

Twitter’s shares rose more than 5% in after-hours trading shortly after earnings were released, but reversed sharply — to more than 12% down — after the gloomy earnings call.

During regular trading, its stock rose $1.84, or 5.3%, to $36.54.

It was a tumultuous quarter for Twitter. The company announced in June that Dick Costolo was stepping down as chief executive, to be replaced on an interim basis by Twitter co-founder Dorsey.

Dorsey is now splitting his time between Twitter and Square, which he also co-founded and where he serves as CEO. During the analyst call, he said Twitter felt the “urgency” of finding
a permanent CEO but “unfortunately we do not have an update to provide today.”

Analysts said it was unlikely that Dorsey would be named permanent CEO because of his commitments to Square. Adam Bain, Twitter’s president of global revenue and partnerships, is widely considered the frontrunner to take the spot.

For the third quarter, Twitter is forecasting a revenue range of $545 million to $560 million.

andrea.chang@latimes.com

Twitter: @byandreachang